Silver and Gold: The Superheroes of Wealth Preservation

The face value of this silver quarter is 25 cents, but it’s really worth a whole lot more.

Back in 1964, a gallon of gasoline cost about 25 cents in the United States. That’s right. Believe it or not, way back in 1964, you could buy a gallon of gas for a quarter.

It just so happens that 1964 was the last year that the US Treasury minted silver coins, including the humble quarter.

(Actually, any numismatist worth his salt will tell you that the so-called Washington quarters minted between 1932 and 1964 weren’t made from 100% pure silver — but at 90% silver and 10% copper, they were pretty darn close.)

Now fast forward to this week.

The national average price for a gallon of gasoline is approximately $3.50 per gallon. Meanwhile, the melt value of a 1932-1964 Washington quarter was hovering around $5.88 — which means that a silver quarter that was used to buy a gallon of gas in 1964 still has enough value to buy a gallon of gas (and then some) almost fifty years later.

The lesson here is that precious metals such as gold and silver act as a reliable store of wealth. That’s true because gold and silver exist in finite quantities and have inherent properties with real value.

It’s no coincidence that gold and silver have been recognized as a medium of wealth by virtually every civilization in the world over thousands of years.

On the other hand, unlike gold and silver, a fiat currency (like today’s US dollar) has no inherent intrinsic value. Nada. None. Zilch.

And although fiat currencies efficiently facilitate commerce by acting as a medium of exchange that is far preferable to bartering — just like silver and gold do — their value is based purely on faith. I know.

Of course, the biggest downside to fiat currencies is that they can be created out of thin air with impunity, as the Federal Reserve has been doing to the US dollar lately with alarming frequency.

Over time, excessive money printing greatly diminishes the value of the currency and the resulting effects can be seen via price inflation. If things get too out of hand, then faith in the currency begins to wane and hyperinflation rears its ugly head, which typically leads to the death of the currency and a painful economic collapse.

Here’s one more example to think about: Let’s assume two poor saps became stranded on a deserted island in 1964. Let’s also assume that both castaways had $10 when they washed ashore; the only difference is the first person had a $10-bill in his wallet, while the other guy had 40 silver quarters in his pockets. Assuming the two waifs were finally rescued in 2012, the guy with the silver quarters would have 23.5 times more purchasing power ($5.88 x 40 silver quarters = $235.20) than the guy with the $10-bill, which just goes to show the pernicious effects of inflation on a fiat currency over time — even at relatively low rates.

The bottom line is that precious metals such as gold and silver will not necessarily increase your wealth over the long haul, but they will preserve the hard-earned wealth you’ve accumulated over your lifetime. That’s important to know. Especially if you’re like me and beginning to have very serious concerns about the continuing viability of certain fiat currencies — and the US dollar in particular.

Comments

This is a very good point! Under ‘normal’ circumstances precious metals are a good way to store value (or labour). This can change under extreme disrunption os life. Continuing from your example with the island – if there was no water on the island temporarily (whilst on the island) water will be more precious than gold and will give more power to the one who has some.

Great point with your water/gold analogy. That is one reason why many people believe that precious metals like gold and silver, may be important to have if the dollar collapses — but they say it should be among the very last things to get on the survival item check list.

Poor saps being left with only 10$….But hey guess it was better having those 40 coins. I like the idea of silver and gold bullion but they are just so expensive. I say when I get some money I am putting some money aside to buy bullion and put in a safe or safety deposit box.

Although I do not collect coins except for some Indian Head pennnies my Dad left me, I have accumulated a lot of silver in more decorative forms. Items like (sterling) silverware, etc. It is nice to know it has kept up with inflation, but I probably will pass it down to our children.

Great article, Len! It´s interesting to note that 20 years ago we were always talking about ways to GROW our capital and where to invest it … now we´re much more preoccupied with where to put it just to hold on to whatever we already have. This, I fear, is not a good sign …..

Good question, Lance. In 2002, the melt price of a silver quarter was about 83 cents. (That happened to be near a low point for silver). Meanwhile, that same year the average price of a gallon of gasoline in the US was about $1.30 (according to the Consumer Energy Report).

So a silver quarter could buy a little over 3/5 of a gallon. Still, not bad. However … to look back over such a short span of time is extremely misleading. Precious metals store of wealth has held steady (with fluctuations, of course) for thousands of years. One of the more popular examples is that the price of a fine suit (or the finest formal clothing of the era in question) has always cost the equivalent of an ounce of gold (give or take), no matter the era.

I am glad to read a balanced post about gold and silver. It is NOT a good long term investment. It IS a reliable store of wealth. In the long run, it has always maintained it’s purchasing power.
I am just as cognizant of the possibility of deflation as inflation right now. The QE’s have not been able to produce economic activity or much inflation. This may be because deflationary forces are currently stronger than governments stimulative policies. I’m not sure the Fed has the ability (politically) to print enough money to cause a collapse of the dollar in the near term.
Therefore, investors should watch inflation trends and the dollar carefully to look for signs of which way the economy will tilt. Deflation would be bad for gold and silver and favor cash.

Deflation would be more harmful to households with debt than inflation would, scares me for my parents sake they’re 50 and have 20 left on their mortgage. Either way, economic collapse is not something I want mixing with my job prospects when I graduate in spring.

I have to say … the “official” gov’t inflation numbers that suggest it’s tame are BS. Inflation is all around us. I particularly notice it in my food bill — despite some companies trying to hide it with smaller packaging — and it is reflected in the price of commodities and precious metals too.

As I see it, deflation is not in the cards. Deflation would make the existing US debt problem even worse, and so the Fed will never let that happen. If they have to print a quadrillion dollars to stave it off, they will. Of course, that comes with its own set of problems.

Frankly, the Fed has painted itself into a box and it has nowhere else to go. The only hope is to halve government expenditures immediately, and take the accompanying short-term pain that would surely result over the following two or three years. But that will never happen because the politicians like being reelected.

And so, the end result is the dollar — and our current standard of living — is going to be toast. The only question is when. (And I’m betting sooner than most people think.)

QE is just money creation by the central bank rather than demand-driven lending doing the creation.

The trouble with the QEs over here and I think also in the US is that they have been directed in some way at buying government debt while the banks have increasing capitalisation. Therefore there is no money being lent into businesses and the QE doesn’t help at all.

On the other hand, money needs to be created all the time as some way of stopping the inevitable increase in entropy. If you build a house and sell it, you get paid for your labour. But if before you sell it, a hurricane blows it down, the work has been destroyed and you have to start again. The only way this can be done is by creating the money in the central bank. Otherwise the economy collapses completely.

Gold is a useful store of work – as long as everything else remains the same. But the rate of production of gold (and I guess silver) is only 0.1% of the gross world product. The rest comes from some recycling (repayment of debt) and fiat currency generation (that’s a gross simplification of course but point remains).

The central banks may have got it wrong recently – or the private banks on their behalf anyway – but that doesn’t mean that we should throw the baby out with the bath water!

I have heard that argument elsewhere too. I’ve been told most of QE stays with the banks and ends up on Wallstreet inflating prices of securities and commodities. Seems to make some sense that a lot of that money stays in the financial industry. How much makes it to regional and local lenders?

Very little really makes it to business – as I said most is swallowed up by buying government bonds on the open market (the BoE can’t buy directly under European rules). The rest wallows in the City/Wall St propping up the banks and their lush lifestyles as you suggest.

You hit the nail squarely here in the comments about inflation, Len. Gov’t inflationary numbers are completely baloney. If you study the changes made during the Clinton years to how inflation is measured, you’d be shocked at what “isn’t” considered inflation. I agree with Jim Rogers on that point: always be weary of numbers provided by any government.

The purchasing power of the ten dollar guy will actually be lower than it was in 1964, due to the corrosive effect of inflation. Therefore, the percentage difference in purchasing power will be much higher than stipulated, and to an exponential degree that is likely to sober people up about wealth preservation.

Thankful, also, of your flat currency concept. :)I doubt if even you are aware of its superlative profundity. 🙂

My main issue with precious metals is delivery, let’s say people lose confidence in the fiat currency. I’m going to need physical access to my precious metals ASAP – do you really believe you’re going to be able to access them when such a crisis is going to occur?

You’re only other option is to buy them and keep them in your home/person – in which case you’re going to be paying a premium on the spot price + you’re going to have to worry about security.

Ashley – in traditional Indian and Nepalese culture, people dealt with the delivery issue by wearing all the silver and gold (particularly gold, the major store of wealth, since unlike silver, gold doesn’t rub off when it’s roughly handled). Eventually it evolved into a fashion, though (like many fashions) it’s one that is fueled/underpinned by the desire to showcase status and wealth.

I guess that’s a long winded way of saying that you could always pile good jewelry onto yourself, safety issues (and a certain gaudiness) notwithstanding. 🙂

We have bit of physical gold and silver, but are not too terribly worried about security. Some of it is worn, some is in a safe deposit box, some in the safe, and some has been midnight gardened.

Gold and silver are just another asset class (and not necessarily an “investment”). As with any hard asset, it’s good to diversify. Personal wealth should probably all concentrated in any one thing, whether in home equity, or precious metals, or notional paper assets.

And to Paula’s point above, as long as Indian and Chinese and other peoples around the world continue to think gold and silver are just swell, we’ll continue to have a bit here and there.

Thanks for the note. I share your concern with the dollar, but am also aware that most conventional thinking doesn’t agree the U.S. dollar will face a currency crisis. Can you say more about your thinking as to why you feel the writing is on the wall?

Without getting our nerves in a knot, I think we should learn to re-adapt to things that we once used. Gold and silver we know was the original form of currency besides bartering. And since there are too many of us on this planet to barter with each other, we should become comfortable with investing in gold and silver. And not only invest in it, but also use a little in our everyday spending.

I think that 1 oz silver eagles are a great way to go – very cheap and liquid.

However I do NOT think that the same is true for the gold eagles. This is because the gold eagles are not pure gold. (As some of your readers will know, a 1 oz eagle is actually significantly heavier than one ounce because it has other metals added to it to make it stronger). The reason why this is significant is because the world’s wealth is shifting towards Asia and if you ever want to sell your gold coins to Asians then it would be good for you to know that, generally speaking, Asians prefer .999 gold. If you are in doubt about this, do some searching on the internet. (eg See what people are selling in China, Hong Kong & Singapore). Therefore, for gold coins I would recommend 1 oz Canadian Gold Maple Leafs or 1 oz Australian Kangaroos instead (which both are .999 gold) (disclosure – I’m an Aussie). Chinese Pandas are also pure gold but there are WAY too many fakes around so I would recommend to steer well clear of them!

I realise that some will disagree with me on this point, especially because gold eagles have traditionally been the most common way for Americans to buy gold coins. However, I do think my point is worthwhile to keep in mind as the world’s wealth shifts east (unless you are sure that you will sell your gold coins in the US). It’s just something to keep in mind.

Oh, and one more thing I forgot to add…
Len, I just read in one of your comments that you are leaning towards gold and silver ETFs. I think I’ll have to respectfully but very strongly disagree with you on that point!! I think with the American and global economy the way it is, I think it’s much, much safer to go for physical that you have in your possession somewhere.

You’re right, John. That comment was written in November 2012 — I only got into ETFs temporarily and was out of them completely by December 2012.

You’re right — ETFs aren’t worth the paper they’re printed on. Today (October 18, 2014) the gold ETF is leveraged at more than 100 to 1 and the silver ETF is also over leveraged. I have since written about that danger many times here. Physical possession is the only way to go: If you don’t hold it, you don’t own it!

I am editing out that portion of the comment so as not to mislead any other readers.

Thanks for the comments, John. If I were interested in trading American Gold Eagles with the Chinese, I might share your concerns. But I suspect that most people who eventually decide to exchange their gold for other goods, real estate, or other things of value will be dealing domestically. 🙂

For the record, lest anybody get confused, the monetary value of a bullion coin is determined by the weight of each metal in the coin — not its fineness. (Numismatic coins can be a different story.) All American Gold Eagles contain 1 full troy ounce of gold — the same amount as a Maple Leaf, Kangaroo, Panda or Krugerand — plus a little silver and copper for added durability. Folks who are interested in an American .999 fine gold coin can buy American Buffalos, which are 1 troy ounce of pure unadulterated gold. Of course, being pure gold, they are softer and subject to being more easily scratched and dented. I own both types of coins, but I prefer the Eagles.

The value of your own savings neither does nor increases in proportion to the inflation rate. In a time of economic crisis, such as what we are in now, the only true way to protect your portfolio is through silver and
gold bullion.

Buying silver bars is said to be the key in surviving upcoming inflation.

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